Monthly Dose Employment Law 05/2026

Remote Cities: Absence of a Works Council-Capable Organisational Unit Due to Insufficient Managerial Authority

BAG Decision of 28 January 2026, 7 ABR 23/24

In its decision of 28 January 2026 (7 ABR 23/24), the German Federal Labour Court (Bundesarbeitsgericht, BAG) had to determine whether the “Remote Cities” of a delivery service company constituted independent organisational units capable of establishing a works council and whether the works council election held there was valid.

Facts of the Case

• The respondent employer operates a delivery service via a digital platform through which customers can order food that is delivered by employed delivery riders. Its organisational structure comprises the company headquarters, so-called “HUB Cities” with administrative and management functions, and “Remote Cities”, in which only delivery riders are employed.
• A works council was elected in Remote City B on 15 December 2022 (Works Council B). The employer subsequently challenged the election, arguing that Remote City B did not constitute an independent organisational unit capable of establishing a works council. Key personnel and social decisions, such as shift scheduling, approval of leave, sickness reporting, recruitment and employment-related measures, were made by HUB City H.
• Works Council B and other parties involved, by contrast, argued that due to their organisational characteristics and proximity to employees, the Remote Cities constituted either independent establishments or at least independent parts of an establishment.
• The Hanover Labour Court (Arbeitsgericht) upheld the employer's application and declared the works council election in Remote City B invalid on the grounds that Remote City B did not constitute an independent organisational unit capable of establishing a works council. The appeal lodged by Works Council B was unsuccessful before the Lower Saxony Higher Labour Court (Landesarbeitsgericht).
• The legal appeals filed by Works Council B, the works council of HUB City H and the election committee of HUB City H were likewise unsuccessful before the BAG. The BAG dismissed the appeals.

Reasons for the Decision

• No independent establishment: Pursuant to Section 1 of the German Works Constitution Act (Betriebsverfassungsgesetz, BetrVG), an establishment requires an organisational unit within which a specific operational purpose is continuously pursued and human labour is directed by a uniform management structure. However, Remote City B had no management of its own responsible for independently handling key personnel and social matters. Employer functions and decision-making authority relating to Remote City B were exercised by HUB City H.
• No independent part of an establishment: Remote City B did not meet the requirements of an independent part of the establishment pursuant to Section 4 BetrVG. This requires a minimum degree of organisational independence from the main establishment, particularly demonstrated through institutionalised management determining employee deployment. Although Remote City B had its own shift and personnel planning, this alone was insufficient to establish organisational independence.
• Digitalisation does not change the concept of an establishment: The BAG agreed with the former instances decisions of the Labour Court Hanover and the Lower Saxony Higher Labour Court that digitalisation, digital communication, app-based management and remotely organised work do not alter the established concept of an establishment. This remains the case unless and until the legislature introduces a different statutory definition or adopts rules requiring a redefinition of the concept.
• No works council-capable unit based solely on a “community of interests”: The BAG made clear that a mere “community of interests among employees” is insufficient to establish an organisational unit capable of electing a works council within the meaning of Sections 1(1) and 4(1) sentence 1 BetrVG. Such a criterion would allow employees themselves to determine the composition of the establishment (or part of an establishment), which would merely reflect a changing snapshot and would not permit a legally certain determination of works council-capable organisational units.
• Consequence of misunderstanding the legal concept of an establishment: Misinterpretation of the establishment concept under works constitution law constitutes a breach of essential election provisions within the meaning of Section 19(1) BetrVG. Following the employer's timely and proper challenge, the works council election had therefore to be declared invalid.

Practical Implications

The BAG’s decision demonstrates that geographically separate sites are not to be regarded as independent organisational units capable of establishing a works council merely because of organisational peculiarities or geographical distance. The decisive factor is whether the relevant organisational unit has sufficiently autonomous management exercising the necessary managerial authority. Such management does not have to be located on site. Mere physical separation or distance from other locations is insufficient.

Even in digital businesses and platform-based business models, the traditional principles of German works constitution law remain decisive, since mere geographical separation does not establish an independent establishment. Election committees should therefore carefully examine the organisational structure before initiating a works council election. Otherwise, there is a risk that the election may be successfully challenged and declared invalid.

Employees working in a Remote City are not left without employee representation under works constitution law. As a non-independent organisational unit, the Remote City is assigned to another establishment, and its employees are represented by the works council responsible for that establishment.

BAG Tightens Requirements for Target Setting: Corporate Objectives Must Be Communicated in Good Time

BAG judgment of 22 April 2026, 10 AZR 28/25

In its judgment dated 22 April 2026 (10 AZR 28/25), the BAG had to determine whether employers may be liable for damages where the corporate objectives relevant to variable remuneration were defined internally but were not communicated to the employee in a timely manner.

Facts of the Case

• The claimant had been employed by the defendant since 1999, most recently as Manager Finance.
• In addition to her fixed remuneration, her employment contract provided for performance-based variable remuneration. The potential bonus amounted to 15% of her annual gross fixed salary. The bonus was calculated based on individual target achievement and a “Financial Modifier” linked to corporate objectives.
• The details of the variable remuneration were governed by a works agreement dated 28 January 2021. Under the agreement, the Financial Modifier could range from 0% to 200%. For the “Intelligent Labels” division, to which the claimant belonged, it consisted equally of a revenue target (“Worldwide Sales”) and an earnings target (“EBIT”). The employer was required to define the specific targets and associated payout values at the beginning of each financial year.
• For the 2022 financial year, the employer did define the relevant corporate objectives internally but did not communicate them to the claimant during the year in question. The claimant only became aware of the objectives after the end of the financial year during a town hall meeting.
• In March 2023, the employer paid the claimant a bonus of EUR 8,012.37 gross for 2022, based on an individual target achievement of 100% and a Financial Modifier of 49%. Had the claimant achieved 100% of her target bonus entitlement, she would have received EUR 16,351.78 gross.
• The claimant sought damages in the amount of the difference, namely EUR 8,339.40 gross. She argued that the employer had breached its obligation to communicate the relevant corporate objectives in good time. Had the objectives been properly communicated, full target achievement should be assumed.
• The Siegburg Labour Court and the Cologne Higher Labour Court dismissed the claim. The BAG, however, upheld the claimant’s appeal and awarded the full amount of EUR 8,339.40 gross claimed.

Reasons for the Decision

• Damages for failure to communicate objectives: The BAG confirmed the claimant’s entitlement to damages under Sections 280(1) and (3), 283 sentence 1 and 252 of the German Civil Code (Bürgerliches Gesetzbuch, BGB). Proper target setting constitutes a contractual ancillary obligation of the employer. If this obligation is culpably breached and subsequent target setting is no longer possible, the employee may claim damages for lost variable remuneration.
• Internal definition of objectives is insufficient: A target-setting decision as a unilateral determination of performance pursuant to Section 315(1) BGB requires communication of the objectives to the employee pursuant to Section 315(2) BGB. Merely defining the corporate objectives internally is insufficient, as employees can only align their performance with objectives of which they are aware.
• No subsequent communication after expiry of the target period: Once the target period has ended, omitted target setting can no longer be effectively remedied. Subsequent communication can no longer fulfil its intended motivational, incentive and steering function because employees cannot retrospectively align work already performed with the objectives.
• 100% target achievement as the basis for calculating damages: For the purposes of estimating damages under Sections 252 BGB and 287 of the Code of Civil Procedure (ZPO), it must generally be assumed that the employee would have achieved 100% of the properly communicated objectives. A different conclusion is justified only where special circumstances indicate otherwise. The burden of pleading and proof for such circumstances lies with the employer. This also applies to corporate objectives over which individual employees have only limited influence.
• Actual failure to achieve corporate objectives does not preclude damages: According to the BAG, the fact that the internally defined corporate objectives were in fact not achieved in the 2022 financial year was insufficient to exclude or reduce the claim for damages. The employer would instead have had to demonstrate that the objectives had been realistically achievable at the time and explain which subsequent developments had prevented their achievement. A general reference to an “economically poor year” was insufficient.
• Burden of proof regarding lawful alternative conduct rests with the employer: The argument that the objectives would not have been achieved even if they had been communicated in time was likewise unsuccessful. The employer bears the burden of pleading and proof with regard to lawful alternative conduct. The mere possibility of the same outcome is insufficient; the employer must demonstrate and prove that the same loss would have occurred even if the objectives had been communicated properly and in due time.

Practical Implications

The decision consistently continues the BAG’s line of case law, further developed in its decision of 19 February 2025 (10 AZR 57/24), regarding delayed or omitted target setting. The BAG had already held that a culpably delayed communication of targets may give rise to a claim for damages where the objectives can no longer fulfil their motivational and incentive function due to the advanced stage of the assessment period.

In its latest decision, the BAG specifies these requirements for corporate objectives. It is not sufficient for an employer merely to define the relevant objectives internally in good time. The objectives must also be communicated to the employee. Only once they have been communicated can they fulfil their intended incentive and steering function. Failure to communicate objectives cannot be remedied after the target period has ended.

Of particular practical relevance is the BAG’s approach to calculating damages. Where an employer has failed properly to communicate targets, achievement of 100% of the objectives will generally be assumed. This also applies to corporate objectives over which individual employees have only limited influence. The mere fact that the internally defined objectives were not actually achieved does not justify reducing the damages award. Employers must instead demonstrate and prove concrete special circumstances showing that the objectives would not have been achieved even if they had been communicated in time. Consequently, in practice, not only the timely definition of objectives but also their documented communication is becoming increasingly important. Employers should therefore review their variable remuneration systems to ensure clear deadlines and communication processes and should document both the setting of objectives and their timely receipt by employees.

Non-Transparent Choice-of-Law Clause: Application of Foreign Employment Law Despite the Choice of German Law

BAG decision of 19 March 2026, 2 AZR 53/25

In its decision dated 19 March 2026 (2 AZR 53/25), the BAG addressed the validity of a choice-of-law clause in an employment contract and the determination of the applicable law in the context of cross-border remote working arrangements.

Facts of the Case

• The claimant, a Dutch national, had been employed by the defendant, which is based in Germany, as a Global Security Officer in the IT sector since 16 April 2018.
• Following a home office agreement concluded between the claimant and the defendant on 20 February 2019, the claimant worked two days per week from his home in the Netherlands and three days at the defendant’s premises in Germany. From 1 March 2019 onwards, social security contributions were paid in the Netherlands. From March 2020, the claimant initially worked exclusively from his home in the Netherlands due to the COVID-19 pandemic. Even after March 2022, he continued to work almost exclusively from there.
• During a continuous period of incapacity for work commencing on 28 November 2022, the defendant terminated the employment relationship with effect from 30 April 2023 for urgent operational reasons.
• The claimant argued that, despite the contractual choice of German law, Dutch law, as the objectively applicable law, applied to the employment relationship. Under Dutch law, dismissal during a period of incapacity for work is generally prohibited; moreover, the required approval from the competent authority had not been obtained. Alternatively, he argued that the dismissal was also invalid under German law due to the lack of social justification.
• The Labour Court upheld the claim. The Higher Labour Court dismissed the employer’s appeal and confirmed that Dutch law applied to the employment relationship.

Reasons for the Decision

• Review of the transparency of the choice-of-law clause: Pursuant to Article 3(1), first sentence, of the Rome I Regulation, a contract shall be governed by the law chosen by the parties. The validity of the choice of law is determined by the law that would apply if the clause were valid, namely German law. According to the BAG, the choice-of-law clause was ineffective under Section 307(1), first sentence, of the BGB, as it constituted a non-transparent clause within the meaning of Section 307(1), second sentence, BGB and incorrectly simplified the legal position under Article 8(1), second sentence, of the Rome I Regulation. In particular, it failed to indicate that, notwithstanding the choice of law, employees retain the protection afforded by mandatory provisions of the law that would apply in the absence of such a choice. In this respect, the BAG extended the case law of the Court of Justice of the European Union concerning choice-of-law clauses in consumer contracts to employment contracts.
• Application of Dutch law pursuant to Article 8 of the Rome I Regulation: Following the invalidity of the choice-of-law clause, the applicable law had to be determined pursuant to Article 8(2) to (4) of the Rome I Regulation. Since March 2020, the claimant had performed his work almost exclusively from the Netherlands. While this was initially temporary and pandemic-related, after March 2022 there was no longer any intention to return. His residence and social security affiliation were also located in the Netherlands. Considering all circumstances, there was therefore no closer connection to Germany.
• Invalidity of the dismissals under Dutch law: Under the applicable Dutch law, the dismissals were invalid because they occurred while the claimant was incapable of work. In addition, the required written approval of the Dutch Employee Insurance Agency (UWV, Uitvoeringsinstituut Werknemersverzekeringen) had not been obtained.

Practical Implications

Employers cannot automatically rely on contractual choice-of-law clauses in cross-border employment relationships. Where a choice-of-law clause does not inform employees that they continue to benefit from mandatory provisions of the law that would otherwise apply, the clause may be invalid for lack of transparency under Section 307(1), second sentence, BGB. Even a valid choice of German law does not exclude the application of mandatory provisions of objectively applicable foreign law that are more favourable to the employee pursuant to Article 8(1), second sentence, of the Rome I Regulation.

Particular caution is required where employees permanently work from abroad. If the work is performed there on a long-term basis and there is no intention to return, the employee’s habitual place of work within the meaning of Article 8(2) of the Rome I Regulation may shift abroad. Employers should therefore review both their choice-of-law clauses and any long-term cross-border remote working arrangements for potential employment law implications in the country in which the work is performed.

In Cases of Dismissal Due to Illness, the Employer Must Prove Receipt of the Invitation to Occupational Reintegration Management (bEM)

BAG judgment of 7 May 2026, 2 AZR 184/25

In its judgment dated 7 May 2026 (2 AZR 184/25), the BAG considered under what circumstances a dismissal due to illness can be regarded as proportionate where the employer is unable to prove receipt of an invitation to occupational reintegration management (betriebliches Eingliederungsmanagement, bEM) previously sent by recorded delivery.

Facts of the Case

• The claimant had been employed by the defendant since 1 May 2015 and had been absent due to illness for more than six weeks in each of the three years preceding the dismissal. The defendant relied, inter alia, on the considerable continued remuneration costs arising from these absences.
• Between 2020 and 2022, the defendant repeatedly offered the claimant participation in a bEM process. The claimant accepted an offer made in August 2022, but did not respond to a further invitation dated 12 April 2023. Subsequently, he again accumulated illness-related absences totalling more than six weeks.
• By letter dated 11 October 2023, the defendant once more invited the claimant to participate in a bEM process and sent the invitation by recorded delivery. Relying on the posting receipt, shipment tracking information and a reproduced delivery confirmation, the defendant claimed that the letter had been delivered on 14 October 2023. The claimant disputed having received the letter and stated that he would have participated in a further bEM process had he received the invitation.
• Following consultation with and approval by the staff council, the defendant terminated the employment relationship by letter dated 15 December 2023 with effect from 30 June 2024 on grounds relating to illness.
• Both the Hamburg Labour Court and the Hamburg Higher Labour Court upheld the claimant’s action for protection against dismissal. The employer’s appeal on points of law before the BAG was unsuccessful.

Reasons for the Decision

• Proportionality of dismissal due to illness: A dismissal on grounds relating to the employee’s person is not justified within the meaning of Section 1(2), first sentence, of the Protection Against Dismissal Act (Kündigungsschutzgesetz, KSchG) if reasonable less severe measures exist for preventing or reducing future absences. While a bEM process is not itself such a measure, it gives concrete expression to the principle of proportionality and serves to identify and develop possible alternatives to terminating the employment relationship.
• Renewed obligation to offer a bEM process: If an employee initially declines participation in a bEM process, the employer must generally take renewed steps to initiate such a process if, within one year of the refusal, the employee again becomes continuously or repeatedly incapable of work for more than six weeks. It is not necessary to wait until one full year has elapsed since the previous refusal. Additional absences may alter the employee’s willingness to participate.
• Failure to prove receipt of the bEM invitation: The defendant was unable to prove that the renewed invitation dated 11 October 2023 had actually been received by the claimant. By analogy with Section 130(1), first sentence, BGB, an invitation to participate in a bEM process is deemed received when it enters the employee’s sphere of control in such a way that, under normal circumstances, knowledge of its contents can be expected. The burden of pleading and proof rests with the employer.
• No presumption of receipt under the scan-based delivery procedure used: According to the BAG, the scan-based delivery procedure used by Deutsche Post in this case did not establish prima facie evidence of receipt. The postal worker electronically confirms delivery before the item is actually placed in the letterbox. Consequently, the delivery confirmation records an event as completed even though, at that point, it is still pending. The BAG expressly left open whether prima facie evidence may arise in connection with other delivery procedures, particularly the former “peel-off label procedure”.
• Witness testimony failed to establish receipt: The employer was likewise unable to prove receipt through the testimony of the postal worker. The BAG did not criticise the Higher Labour Court’s assessment that the testimony had little evidential value. The postal worker had no recollection of the specific delivery, could not reliably identify his signature and could not confirm a consistently followed delivery process.
• Extended burden of pleading and proof on the employer: Since the employer could not prove that it had properly initiated a renewed bEM process, it bore an extended burden of pleading and proof. It would have had to demonstrate, and if necessary prove, that a bEM process would objectively have been futile, meaning that neither alternative employment opportunities nor any other reasonable measures could have been identified to reduce future absences or preserve the employment relationship. The employer failed to do so.
• Dismissal disproportionate and therefore invalid: Since the employer could not demonstrate that a properly conducted bEM process would objectively have been futile and that no less severe measures were available, the dismissal due to illness was disproportionate and therefore socially unjustified within the meaning of Section 1(2), first sentence, KSchG.

Practical Implications

The decision once again highlights the considerable importance of bEM procedures in the context of dismissals due to illness. Employers must not only offer a bEM process in principle but, where appropriate, must also initiate it again if further absences exceeding six weeks occur within one year following a refusal or a failure to respond. Employers should therefore continue to monitor sickness absences even after a bEM offer has been rejected or ignored.

In addition, the decision clarifies that the scan-based recorded-delivery procedure assessed by the BAG does not establish prima facie evidence of receipt. Employers should therefore ensure, particularly in relation to bEM invitations, that they use a delivery method capable of reliably proving receipt in the event of a dispute. Suitable options may include personal delivery against written acknowledgement of receipt or documents the deposit into the letterbox.

Although the absence of a required bEM process, or the inability to prove its proper initiation, does not automatically render a subsequent dismissal invalid, it considerably increases the employer’s burden of pleading and proof in dismissal protection proceedings. The employer must demonstrate, and if necessary prove, that a bEM process would objectively have been futile and that no less severe alternatives to dismissal could have been identified. The decision therefore underlines the importance of carefully conducting and documenting the bEM process well before any dismissal for illness-related reasons is contemplated.

Engagement of External Personnel Through an Intermediary: Dependent Employment Without the Intermediary Qualifying as Employer

Berlin-Brandenburg Higher Social Court decision of 21 January 2026, L 16 BA 48/23

In its decision dated 21 January 2026 (L 16 BA 48/23), the Berlin-Brandenburg Higher Social Court (LSG) had to determine whether pilots engaged through a UK-based intermediary company should be regarded as employees of the airline within the meaning of Section 7(1) of Book IV of the German Social Code (4. Sozialgesetzbuch, SGB IV), despite contractual arrangements designed to reflect self-employment and the partial interposition of personal service companies.

Facts of the Case

• The claimant was a UK limited company with no branch office in Germany. Its business consisted of maintaining a pool of qualified pilots and supplying them to an Irish airline (R) for flight operations. R operated several bases in Germany from which flight and cabin crew were coordinated and supervised.
• The cooperation was based on a pool agreement concluded between the claimant and R. Under that agreement, the claimant was required to maintain a pool of qualified pilots to which R had exclusive access. The pool pilots were to serve as members of R’s flight crews on aircraft operated by R and were expected to provide up to 900 block hours annually.
• Initially, the claimant entered directly into contracts with the pilots. From 2009 onwards, Irish limited companies were in some cases interposed, with the relevant pilots acting as shareholders or directors. These companies undertook to provide the flight services through the specifically designated pilot.
• Following the conclusion of the contracts, the claimant generally had no direct contact with the pilots. It calculated remuneration based on data and flight hours supplied by R and paid the amounts to the pilots or the intermediary companies.
• The actual organisation of the work, however, was essentially carried out by R. In particular, R assigned home bases and duty rosters, decided on promotions, conducted training and assessments, and handled sickness and holiday notifications. The pool pilots wore the same uniforms as pilots employed directly by R, worked alongside them as part of the same crews and were subject to the professional supervision of R’s base captains.
• Following an audit, the German Pension Insurance Authority initially assessed social security contributions, including late-payment surcharges, of approximately EUR 7.37 million against the claimant for the period from 2007 to 2016. It considered the pool pilots to be dependent employees and the claimant to be their employer. After separation of the proceedings, the model case concerned five pilots and social security contributions amounting to EUR 356,716.75, including surcharges.
• The Berlin Social Court upheld the claimant’s action. While it considered the pilots to be dependent employees, it found that the claimant was not their employer and therefore not liable for the social security contributions. The appeal brought by the German Pension Insurance Authority was unsuccessful before the Higher Social Court.

Reasons for the Decision

• Dependent employment due to comprehensive integration into the business organisation: Assuming German social security law applied, the pilots were dependent employees within the meaning of Section 7(1) SGB IV. Decisive factors included their extensive integration into R’s operational organisation and their subjection to instructions concerning the time, place and manner of their work. They were incorporated into flight and duty rosters established by R, assigned home bases by R and subject to the instructions of base captains and the Operational Manual.
• Contractual intention not determinative: The parties’ contractual intention to establish a self-employed relationship did not preclude a finding of dependent employment. Parties cannot freely determine social security status by private agreement. What matters is the actual organisation and performance of the work and the overall picture resulting from the factual circumstances.
• Interposition of companies does not exclude employment status: The interposition of Irish limited companies whose shareholders or directors were the pilots themselves did not prevent a finding of dependent employment of the natural persons concerned. In particular, this did not require any finding of a sham transaction. The decisive question remained whether the individual was, in practice, subject to instructions and integrated into a third party’s business organisation.
• No significant entrepreneurial freedom: There were no material entrepreneurial freedoms indicative of genuine self-employment. In particular, the pilots could not freely determine their assignments but were integrated into R’s operational processes and duty schedules.
• Claimant not the employer of the pilots: Despite the existence of dependent employment, the claimant was not the employer and therefore not liable for social security contributions within the meaning of Section 28e(1) SGB IV. In multiparty arrangements, it is necessary to determine separately which party performs the relevant employer functions. After providing the pilots, the claimant retained no significant managerial or employer functions; actual control over the work was exercised by R.
• Neither service contract nor employee leasing arrangement: The claimant’s status as employer could not be derived from the argument that the pilots acted as its agents in the performance of an independently organised service contract for R. The claimant lacked both its own operational organisation and any significant entrepreneurial discretion. Nor was there an employee leasing arrangement under which the claimant would have remained the employer as lender. In particular, the claimant retained no substantive right to issue instructions to the pilots that could have been delegated to R. The essential employer functions were exercised directly by R.
• Applicability of German social security law left undecided: Since the claimant was not the employer and therefore not liable for the assessed social security contributions, the court did not need to determine conclusively whether German social security law actually applied to the pilots’ employment.
• No decision regarding R’s liability for contributions: Whether R itself qualified as the employer for social security purposes and was therefore obliged to pay social security contributions was not the subject matter of the proceedings and was not decided by the court. The proceedings concerned only the contribution claim issued against the claimant.

Practical Implications

The decision demonstrates that dependent employment cannot be avoided merely by interposing a corporate entity. The actual circumstances remain decisive: where an individual is subject to instructions and integrated into the client’s work organisation, dependent employment may exist even where the services are formally provided through a personal company. Businesses should therefore evaluate external workforce arrangements not only by reference to their contractual structure but also based on their practical implementation.

At the same time, the decision illustrates that employment status and the identification of the employer for social security purposes are distinct issues. In multiparty contractual arrangements, particular attention must be given to identifying the party that actually performs the essential employer functions. An intermediary does not automatically become the employer simply because it contracts with the individuals concerned and administers and pays their remuneration; what matters is the actual control of the workforce and the exercise of managerial authority.